Investment and Capital Market Imperfections: An International Comparison

Is investment cash-flow sensitivity affected by a country’s capital market imperfection? We take 42 countries as our sample and collect six imperfect capital market measures (ICAM), ie., the stock market capitalization ratio, number of publicly-listed firm, stock turnover ratio, bank loan ratio, long-term debt ratio and the interest spread. Using a two-step approach, negative relationships between the sensitivity and the six imperfect capital market measures are found, but are significant only when the number of publicly-listed firms, the bank loan ratio, and the turnover ratio are used as the imperfect capital market measure. We also find that the bad “legal environment indicators (macro governance)” increases cash-flow sensitivity. The fast real GDP growth, however, has no effect on the cash-flow sensitivities. Hence, an increase in capital market depth and better macro governance will reduce the cash-flow sensitivity. keywords: cash flow sensitivity, capital market imperfection, financial constraints, macro governance JEL: G20, G31, O12, O16